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Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices - SEBI - SEBI/HO/CDMRD/DRMP/CIR/P/2020/176

Extract

..... mmodity prices globally, particularly in the case of Crude Oil, wherein the prices had unprecedentedly gone down to zero and subsequently, even negative. In such a scenario, margins equivalent to even 100% of the futures price would not have been sufficient to cover the steep upward or downward price variations in the futures market. 3. In order to enable risk management framework to handle such a scenario of ’near zero’ and negative prices, SEBI constituted a Task Force of Clearing Corporations (CCs) and market participants to review the risk management framework in such cases. The following has been decided based upon the recommendations of the said Task Force: - 3.1. Alternate Risk Management Framework (ARMF) shall be applica .....

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Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices - SEBI

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..... tion of the same. 4.2. bring the provisions of this circular to the notice of their members and also to disseminate the same on their website. 4.3. communicate to SEBI, the status of implementation of the provisions of this circular. 5. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. 6. This circular is available on SEBI website at www.sebi.gov.in. Yours faithfully Vishal V. Nair Deputy General Manager Division of Risk Management Commodity Derivatives Market Regulation Department vishaln@sebi.gov.in Annexure - I Alternate Risk M .....

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Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices - SEBI

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..... tions or any other additional conditions that may be identified by the CC becomes applicable, the CC in consultation with their respective stock Exchange will conduct a review and take a formal decision on whether there is a need to activate the ARMF. The CC shall subsequently also communicate its decision to the market and other stock Exchanges/CCs. If the Lead CC, as defined in SEBI circular no. SEBI/HO/CDMRD/DRMP/CIR/P/2020/15 dated January 27, 2020, has activated the ARMF, then the other CCs shall also follow the same. 4. The CC shall strive to intimate to the market, well in advance, the threshold price level, below which the ARMF shall be activated. B. Characteristics of the ARMF: The ARMF shall have the following characteristics: - 5 .....

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Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices - SEBI

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..... options shall be done using appropriate models like the Bachelier model, or any other model which can be applied on negative underlying prices. 9. Pre-expiry margins: The appropriate pre-expiry margins shall also be levied by CCs on cash settled contracts, in respect of those commodities in which the ARMF is triggered. 10. Extreme Loss Margin (ELM): In case the price of any futures contract goes below a threshold, ELM shall be levied on such threshold price or absolute price of the contract, whichever is higher. The CC shall decide threshold price in respect of each commodity on which ELM under the ARMF shall be made applicable. 11. Other margins: CCs may levy other margins such as additional margins, special margins, concentration margins .....

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Alternate Risk Management Framework Applicable in case of Near Zero and Negative Prices - SEBI

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